3-25 CVP exercises. The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit. Consider each case separately: 1. a. What is the current annual operating income? b. What is the current breakeven point in revenues? Compute the new operating income for each of the following changes: 2. A $0.04 per unit increase in variable costs
3-25 CVP exercises. The Doral Company manufactures and sells pens. Currently, 5,000,000 units are sold
per year at $0.50 per unit. Fixed costs are $900,000 per year. Variable costs are $0.30 per unit.
Consider each case separately:
1. a. What is the current annual operating income?
b. What is the current breakeven point in revenues?
Compute the new operating income for each of the following changes:
2. A $0.04 per unit increase in variable costs
3. A 10% increase in fixed costs and a 10% increase in units sold
4. A 20% decrease in fixed costs, a 20% decrease in selling price, a 10% decrease in variable cost per
unit, and a 40% increase in units sold
Compute the new breakeven point in units for each of the following changes:
5. A 10% increase in fixed costs
6. A 10% increase in selling price and a $20,000 increase in fixed costs
3-26 CVP analysis, income taxes. Westover Motors is a small car dealership. On average, it sells a car
for $32,000, which it purchases from the manufacturer for $28,000. Each month, Westover Motors pays
$53,700 in rent and utilities and $69,000 for salespeople’s salaries. In addition to their salaries, salespeople
are paid a commission of $400 for each car they sell. Westover Motors also spends $10,500 each month for
local advertisements. Its tax rate is 40%.
1. How many cars must Westover Motors sell each month to break even?
2. Westover Motors has a target monthly net income of $69,120. What is its target monthly operating
income? How many cars must be sold each month to reach the target monthly net income of
$69,120?
3-27 CVP analysis, income taxes. The Home Style Eats has two restaurants that are open 24 hours a
day. Fixed costs for the two restaurants together total $430,500 per year. Service varies from a cup of coffee
to full meals. The average sales check per customer is $8.75. The average cost of food and other variable
costs for each customer is $3.50. The income tax rate is 36%. Target net income is $117,600.
1. Compute the revenues needed to earn the target net income.
2. How many customers are needed to break even? To earn net income of $117,600?
3. Compute net income if the number of customers is 170,000.
3-28 CVP analysis, sensitivity analysis. Perfect Fit Jeans Co. sells blue jeans wholesale to major retailers
across the country. Each pair of jeans has a selling price of $50 with $35 in variable costs of goods sold. The
company has fixed
are paid to the wholesale sales reps at 10% of revenues. The company has an income tax rate of 20%.
1. How many jeans must Perfect Fit sell in order to break even?
2. How many jeans must the company sell in order to reach:
a. a target operating income of $420,000?
b. a net income of $420,000?
3. How many jeans would Perfect Fit have to sell to earn the net income in requirement 2b if: (Consider
each requirement independently.)
a. the contribution margin per unit increases by 10%.
b. the selling price is increased to $51.50.
c. the company outsources manufacturing to an overseas company increasing variable costs per
unit by $2.00 and saving 70% of fixed manufacturing costs.
3-29 CVP analysis, margin of safety. Suppose Morrison Corp.’s breakeven point is revenues of $1,100,000.
Fixed costs are $660,000.
1. Compute the contribution margin percentage.
2. Compute the selling price if variable costs are $16 per unit.
3. Suppose 75,000 units are sold. Compute the margin of safety in units and dollars.
4. What does this tell you about the risk of Morrison making a loss? What are the most likely reasons for
this risk to increase?
3-30 Operating leverage. Cover Rugs is holding a 2-week carpet sale at Josh’s Club, a local warehouse
store. Cover Rugs plans to sell carpets for $950 each. The company will purchase the carpets from a local
distributor for $760 each, with the privilege of returning any unsold units for a full refund. Josh’s Club has
offered Cover Rugs two payment alternatives for the use of space.
■ Option 1: A fixed payment of $7,410 for the sale period
■ Option 2: 10% of total revenues earned during the sale period
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
